Firm a and Firm B Are Identical Except That a Is

question 27

Multiple Choice

Firm A and Firm B are identical except that A is incorporated while B is an unlimited liability partnership.Both have assets worth $500,000 ($500K) funded with a debt ratio of 40 percent.Suppose that the assets suddenly become worthless.What is the maximum possible loss to the equityholders of each company?

• A)Firm A: $300K; Firm B: $500K
• B)Firm A: $200K; Firm B: $300K
• C)Firm A: $500K; Firm B: $200K
• D)Firm A: $500K; Firm B: $500K

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Definitions:

Financial Leases

A type of lease where the lessee has use of the asset for a significant portion of its useful life, and the lease terms closely resemble the conditions of outright ownership.

Capitalized

To be capitalized means to record an expense as an asset on the balance sheet rather than an immediate expenditure, spreading its impact over its useful life.

Lease Obligations

Financial commitments arising from lease agreements, which may include future lease payments for rented equipment or property.

Coupon Rate

The rate of interest paid yearly on a bond, represented as a percentage of its face value.